LONDON, July 11 (Reuters) - Host to the most important U.S.and French military bases in Africa, the tiny Red Sea state ofDjibouti agrees it faces a risk of retaliation from the Islamistmilitants its Western guests hunt on forays into nearbycountries.

But it argues the menace is limited.

Instead, the strategically placed country points to what itsuggests is a more significant, long-term securityconsideration: the poverty, unemployment and regional politicalinstability it sees as potential pathways to extremist thinking.

"Of course we worry about the risks that could berepresented by the international military and securitypresence," Djibouti Economy and Finance Minister Ilyas MoussaDawaleh told Reuters on a visit to London.

"We accept that it represents a threat for us in terms ofsecurity," he said, before adding that security officials werecapable of minimising the risks.

"But the area where maybe we have to take care of, isproperly fighting poverty and unemployment of our youth.Terrorists will be using that to manipulate those in need."

Djibouti, located on one of the world's busiest maritime searoutes and facing turbulent Yemen across the Gulf of Aden, hostsFrance's largest military base in Africa plus a major U.S. base,and the port is used by foreign navies patrolling busy shippinglanes off the coast of Somalia to fight piracy.

In December, Djibouti started contributing soldiers to anAfrican Union force in Somalia fighting against al Shabaabmilitants trying to overthrow a fragile interim government.

Al Qaeda-linked al Shabaab has vowed to launch revengeattacks against African nations participating in the force.

But Dawaleh, in London for talks with British officials,suggested any security risks from militancy were under control.

"I don't think terrorists will directly attack the Americancamp or the French base," he said. "They will rather attackvulnerable Djiboutians and Djibouti interests, but people whoare in charge of that subject are coordinating their effortswell to minimise (risk)."

JOBS ARE INSURANCE

Dawaleh said lack of regional economic integration was amore significant long-term stumbling block to economic growthand the regional stability that would provide.

With few natural resources and little industry, Djibouti hasan unemployment rate of almost 60 percent. The nation dependsheavily on foreign assistance for its balance of payments and tofinance development projects.

Western media reports said Djibouti had received 30 millioneuros ($36.75 million) a year from the French in rent and $30million dollars from the United States for the bases.

"Djiboutians are ... peaceful, not much oriented to this badpractice (militant Islamism). Djibouti has the particularity ofa small city, a small country - everyone knows everyone. It ismuch easier to identify any kind of (threat)," Dawaleh said.

"But we have to address youth unemployment and poverty. Thisis the only insurance to avoid such a shifting towards that kindof practice."

Djibouti serves as a port for its landlocked neighbourEthiopia, which accounts for about 70 percent of traffic, and isalso bordered by Eritrea and Somalia.

Dawaleh said Djibouti, Ethiopia and South Sudan were makingrapid progress in implementing projects to knit their economiescloser together, including an oil pipeline, a fibre-optic cableand road and rail links.

South Sudan signed a memorandum of understanding withEthiopia and Djibouti around trade in February which includedthe possibility of building an oil pipeline, a South Sudanofficial said in February.

Dawaleh said he wanted such ventures to serve as a model for regional integration. He added: "We need more economic andsocial integration rather than having wars and poverty." ($1 = 0.8164 euros)